This piece is part of a series of briefs looking at specific state proposals for family tax benefit reforms based on a more comprehensive Niskanen report, The State of our Families: Child and Dependent Tax Benefits in the States. You can find other state briefs here.
The Illinois legislature is considering a bill (HB4917) that would introduce a fully refundable child tax credit (CTC) worth up to $300 per child as part of the FY2025 budget. If passed, Illinois would become the 12th state to implement such a policy.
As proposed, the full credit would be available to single parents earning up to $50,000 and married parents earning up to $75,000. At that point, the credit would begin to phase out at a flat 2% rate until reaching $0. Figure 1 shows how the credit would impact a single parent with one child in the context of Illinois’ existing dependent exemption and state earned income tax credit.
Benefits
The proposed bill, similar to other states’ fully refundable CTCs, offers a significant improvement relative to Illinois’ current dependent exemption (see Figure 1). It ensures that all low-income families with children would receive the maximum credit amount, regardless of their earnings. In contrast, the existing dependent exemption only begins to phase in once households earn a certain threshold.
The proposed credit strikes a nice balance between the universal (or near universal) CTCs we find in New England and the hyper-income-tested CTCs in states like California and Oregon. Importantly, it avoids the problems facing CTCs in the latter states, which exacerbate work penalties for families just above the poverty line because the credits’ phaseout range overlaps with phaseout ranges for other programs like federal and state EITCs, SNAP, and childcare subsidies. As Figure 1 indicates, the proposal sets the phaseout thresholds high enough to avoid overlapping with other benefit phaseouts in most cases. These more moderate thresholds are paired with a more reasonable 2% phaseout rate.
Drawbacks
Setting the phaseout thresholds at $50,000 for single parents and $75,000 for married parents would create marriage penalties for many middle-class households. For example two parents, each earning the median wage, would lose the full credit if they were to marry.
The proposal would require a substantial fiscal commitment and misses an opportunity to produce significant cost savings and simplification by leaving the existing dependent exemption untouched. Several states have fruitfully converted existing child-related tax benefits into fully refundable CTCs in the last year, including Maine, Massachusetts (which converted existing dependent exemptions), and Minnesota (which converted an existing state EITC). The Illinois proposal deviates from this new trend.
Improvements
Policymakers should consider adjusting the phaseout thresholds upward to address some remaining work and marriage penalties. Raising the phaseout threshold to $60,000 for single parents would entirely eliminate the small amount of EITC overlap that would impact some single parents with more than one child while raising the phaseout threshold to $120,000 for married parents would eliminate the potential marriage penalty that could impact some middle class households.
Folding the existing dependent exemption into a universal, more generous CTC would help reduce the overall cost of these comprehensive reforms while maintaining the principle that all parents deserve support for raising children.
Despite the drawbacks, HB4917 would be a significant stride toward better support for Illinois families and position the state as a pioneer in innovative family policy.